An Interesting Opportunity

Posted: Fri Jul 25, 2014 3:28 pm

Last week I ran into an aquaintance that I've known for years. His family has owned and operated a business for the past 40+ years that specializes in powder coating, electrocoating, and screen printing. The business is located in a 30,000 sq ft building in a prime location close to the highway. His brother and sister are 1/3 owners with the other brother already retired. The sister has health problems and will retire in the near future. My friend is also getting close to retirement and would like to wind down soon. The company has a lot of good will business - regular customers who provide lots of repeat business who have been with him for years. He has 30 well-trained employees that are dependable and do great work. The facility looks impressive on paper, although I haven't been inside yet. There are at least two large gas-fired ovens with at least one that can probably fit most car frames, a lengthy conveyor system for the electrocoating process, and large spray booths. The building has decent office space, a large loading dock, and is on over 3 acres of land.

When he mentioned that he wants to retire soon, I asked if the business will be sold and expressed my interest. (He knows about my small powder coating venture.) That led to a lunch meeting yesterday where we discussed some of the details. We have a lot more ground to cover before I'd even consider making an offer, and there is one caveat. The land is worth a lot of money and they plan to just lease the property since there's a good chance that the land will be sold in the next few years. That would mean that the entire business would have to be relocated - no small feat considering the infrastructure that's in place there now. He threw a price out that I know would be feasible for bank financing, so my only concern would be the long-term situation regarding the property.

This is probably the only oppportunity of it's kind that will ever cross my path, so I intend to play this out. We'll be meeting again in the next couple of weeks. A plant tour is the intent, and then I'll probably ask him to open his books so that I can get an idea of the revenue the business is currently generating, along with the operating expenses that are likely considerable.

Would I consider leaving my job of 33 years for something like this? You bet I would, if I knew that the property situation would be stable for longer than a few years. I've been fortunate to hold 6 different positions here, which along with my outside experience makes me very confident that I could take over and grow the business. He has never gotten into the restoration phase of powder coating, (cars, bikes, wheels, etc.) so that would be an area that I could expand into.

This is a long shot - I'd say the odds are 100-1 for it working out, but I intend to fully explore it. At this point, I'll be given first shot at making an offer once he has the co-owners on board.

To be continued...

Posted: Fri Jul 25, 2014 3:48 pm

Pretty cool Tom!

Hope it works out. Nothing ventured. Nothing Gained.

Jim

Posted: Fri Jul 25, 2014 3:51 pm

Sounds like a great opportunity. Regarding the land, do you need it? Could they repackage it so that you only have to buy what you need for the facility, access and a bit of growth, and they have the rest to work with ...

Good luck!

Regards,

Max

Posted: Fri Jul 25, 2014 4:14 pm

Go for it Tom ! I hope it all falls into place for you !

Good things happen to good people Very Happy

Posted: Fri Jul 25, 2014 5:38 pm

Check on soil contamination, could you use that amount of money and do it yourself with no existing overhead or employees? If pretty rough when you have to start out making 50k a week.

Toddk

Posted: Fri Jul 25, 2014 7:37 pm

toddk wrote:

Check on soil contamination, could you use that amount of money and do it yourself with no existing overhead or employees? If pretty rough when you have to start out making 50k a week.

Toddk

It's a big operation and there's no way it could be done by one person. The building is full of equipment that's constantly in use. There's so much to keep running that one person is full time just on maintenance. They have multiple lines running simulataneously with certain people dedicated to specific tasks. As an example, the cleaning/prep process for their large volume electrocoating line has 7 steps.

They specialize in large volume mass production coating. In other words, dozens of the same item get finished at the same time.

Not sure I know what you mean regarding it being tough starting out at 50K a week...

Posted: Fri Jul 25, 2014 8:13 pm

don't do it in MHO.

Posted: Fri Jul 25, 2014 10:22 pm

I always worry about expenses, with 30 employees your going to need huge volume. Revenues have to be large and consistant. Once you get a look at the books, it will tell alot. Your already a success at what your doing, so I don't doubt it can be done.

Good luck

Toddk

Posted: Sat Jul 26, 2014 3:01 am

I've managed an Aircraft repair station for regional airlines with up to 160 employees and a 13M annual budget, its insane the small margins in that industry. Find out what his margins are, also do not try and figure out the books on your own, there are people that specialize in helping broker buying a business. The due diligence that is required is crazy.

I wanted to open a Gelatteria one time and was looking at an existing store, he wanted $125K for the business and once I got done with the books it was worth $18K. The owner couldn't believe it, he was insulted by what we showed him. He said I have $70K invested in equipment and a loan and yada, yada, yada. I was generous and offered $25K and said he could just walk away. This went on for a whole year and finally when I was over it he offered me the business at my original offer. It was too late, I took a different career path.

Once you take all the depreciation for the equipment, furnishings, supplies etc, the worth drops quick. Its all about revenue vs. expenses.

Bottom line, you would need to consider having at least a 5 year lease with a no sale clause of the property, and also consider the cost of moving it if that happens. You have to factor all the expenses for that and take that out of the sale price. It's a win win to them no matter what. They sell the business and get a profit, then sell the land and get a profit and your out all the revenue you built up only to spend it on moving.

That would not be good.

Posted: Sat Jul 26, 2014 4:45 am

Tom, I like what Nunzio said, I would go one step further. The property the business is on should be part of the sale, the uncertainty of having to move at some not too distant future would be a deal breaker. Consider that it will be difficult for the owners to sell this type of business, so you are the man.

Good luck, Chico.

Posted: Sat Jul 26, 2014 12:01 pm

This is all good advice and I'm glad that I posted here. I agree that moving the business will be a deal breaker, but I think they're more interested in making a million+ dollars on the land than including it. (It could actually be several million.) I think they have two options - one is to sell the whole package, or find an existing PC company that's willing to buy the equipment, along with the good will.

Moving that operation would be a bitch. One of the larger ovens is mounted rooftop and is conveyor-fed. That would cost thousands to move - it might be cheaper to just replace it. Then there's the 600 gallon paint tank, lengthy conveyor systems, etc. It would take weeks to get everything moved and reinstalled, not to mention all the prep work that would be necessary at the new location.

We'll see where this goes but I have a feeling it's not going to go anywhere. For the sake of the 30 employees, I hope something works out so they don't lose their jobs.

Posted: Sun Jul 27, 2014 6:20 am

One other very simple thing that jumps straight up is who is going to pay the 30 employees while the plant is shut down during the move, sure a few could be given work on the move but many would probably have to take holidays and that then involves paying a lump in holiday pay, and this is on top of the fact the factory is generating no income in this period as well, apart from the actual moving costs. Just something else to think about.

Posted: Sun Jul 27, 2014 9:32 am

Makes for a pretty big debt load right off. That moving expense isn't going to go away whether it's now or in a few years. If they want the millions for the real estate, it's possibly going to kill that business. Don't be left holding the bag. The move should be designed into the sale of the business.

Posted: Sun Jul 27, 2014 10:50 am

Tom, this is a nightmare waiting to happen.
Breaking down old kit and moving it elsewhere is not a good business move.

Don't be the patsy they are looking for. This has all the hallmarks of being a lemon with the land being sold from under you.

IMHO, DON'T DO IT!!!

Posted: Sun Jul 27, 2014 12:57 pm

mikerobpen wrote:

Tom, this is a nightmare waiting to happen.
Breaking down old kit and moving it elsewhere is not a good business move.

Don't be the patsy they are looking for. This has all the hallmarks of being a lemon with the land being sold from under you.

IMHO, DON'T DO IT!!!

No worries - I won't do it. He's going to give me a plant tour in a couple of weeks and I'm going to tell him that I'm not interested unless the land and building come with the package. He's going to have a lot of trouble selling the company if he doesn't do this.

Posted: Sun Jul 27, 2014 2:39 pm

Tom,

I do this for a living (investment banking in the lower middle market) and since my office is in lexington, ma if you are serious, perhaps we should talk. Although I am industry agnostic, I work with a lot of fab shops most of which have powder coating operations. You will want copies of all their financial history but top line and bottom line (EBITDA) would tell enough to begin. Then there is the balance sheet...goodwill is nice but that is essentially the difference between the book value of the company and what it sells for. How much can you borrow against the business...leveraging equipment, accounts receivable, cash flow, and inventory? consider that the equipment is probably only worth at best .50 on the dollar to the bank.

As for the property and a need for relocating, we typically make the purchase contingent on the owner signing a longterm lease...at least 5 years with an option to renew...or whatever you want...its your offer.

One more thing....despite what you may know or think...this is a hazardous business/industry. electroplating, painting, powered coating...etc. you will want to have some serious environmental surveys done on the joint before doing anything.

Posted: Sun Jul 27, 2014 4:26 pm

Buy whatever equpiment you want from him to grow your shop, grab the good employees.

I don't hire any employees until we are busting at the seams so they generate revenue on arrival. I know you can not descrimate against age, but you look at the general age of your employees.

Everyone in our company, except our receptionist is 60, that is not a good thing. If I want the busines to continue and I do, when they retire I have to keep working.

Toddk

Posted: Wed Nov 12, 2014 2:03 am

I met with the owner again today and got a tour of the facility after the shop closed for the day. He's got a really good gig going, with multiple large volume batch jobs from customers he's been doing business with for years. Two large spray booths for powder coating, another for painting, and a ridiculously cool electrocoating setup that's conveyor fed. Parts move along at 7 feet per minute, get immersed in an electrically charged paint bath, then work their way up to a rooftop oven that cures the finish in 20 minutes. Back down they come to cool off and get unloaded. Aftermarket repro fenders and car parts could easily be primed and pre-finished in this setup.

Many of the parts he finishes are on products you see every day. Besides electrocoating and powder coating, they also do screen printing on parts that they've just coated. Things like cases for electronic items that need labeling for the various connections like you'd see on a cable box or stereo...

The business is profitable and he's willing to open the books for me to review if I want to go to the next step. I told him that selling the business without the building or land is a deal breaker and he somewhat agreed. I said, "Why not just hire me to take over and run the business for you?" He didn't seem opposed to the idea, so there's a possibility.

It's still a long shot, but I want to go the distance exploring this. There's lots of potential for expansion and I see the automotive and motorcycle restoration areas as great "filler" in between the volume work.

Next time I'm there I'll take some pictures...

Posted: Wed Nov 12, 2014 9:32 am

Hi Tom,
I'm the first to admit I'm no business man, but all the respondents raise extremely valuable points.

Perhaps it's time to step back for a moment from the enticing idea of taking over the business and the easy captivation of all the cool gear in the shop, put it right out of your mind and ask yourself the important questions, namely "What do I, Tom, really, REALLY want to achieve for myself and my family from my powder coating business in the next 12 months, 2 years, 5 years??" then followed by "How will those goal be safely and comfortably be achieved and financed with as small a risk as possible to losing what I have already achieved in my life ?"

Once those answers are crystal clear, both with you and loved ones, then see IF purchasing the business on offer moves you towards or away from those goals and risks.

Get very clear on what is comfortably achievable and what your appetite for risk is - clearly you already do FABULOUS work with what you have today , but I would suggest (at the moment at least) only for a very (not to mention highly appreciative) small niche market.

I sure can see how access to the 'stuff' in the shop would set anyone's mind spinning with the potential, but do you REALLY want to be in the situation of ABSOLUTELY having to work all hours of the day and night just to get PC 10,00 doohickeys by 4:00 pm Friday (not to mention hoping you get paid on time by the customer) just to make the wages bill for the fine folk who work there, (and quite possibly none of those wages will end up in your pocket?)

Maybe if you were able to come on board as a manager / sales consultant or something with a shared incentive to grow the business (into the resto' market), even as a sideline to the main bread and butter stuff it already does and share the $$ with him. Meanwhile you have access to all cool toys to deliver even better product faster and grow your customer base and reputation for your own market.

Then, when (not if) the land is up for sale, dollars to doughnuts much of the gear will be available for cents in the dollar and you will still have been able to grow your niche and customer base and may have the option (or first dibs) on the best of the gear and staff when it comes up for grabs.

Think outside the box regarding options for you being part of the shop for the short term and your long term goals for your own PC business just may be able to be realised with almost no risk or sleepless nights for you and, equally importantly your family and relationships. (There's a lot of truth in the old adage, "When money walks out the front door, love walks out the back.")

Be gentle with yourself as you work through the process to make this important decision, but best of all follow your logical mind first, and heart last. The right decision for you will become crystal clear.